What is a hard money loan?
Real property secures a hard-money loan. Hard-money loans are “last resort” or bridge loans. Individuals or corporations, not banks, lend these loans for real estate transactions.
How Hard Money Loans Work
Hard money loans primarily depend on the property value as collateral, not the borrower’s creditworthiness. Hard money lenders are usually private people or firms who find value in this potentially hazardous endeavor, as banks do not lend.
Hard-money loan interest rates
Hard-money loans offer higher interest rates than mortgages. Hard money loan interest rates averaged 10%–18% in July 2022. Hard money loans cost far more than a standard mortgage, which had a 4%–5% interest rate that month.
Flippers and short-term investors may not care. If they repay the loan soon, the high interest rate will be less noticeable and cheaper. For most others, a lower-interest loan makes sense. The main benefit of a hard money loan is quickness, but if you can wait a few months, consider refinancing your property or getting a personal loan.
Example: Hard Money Loans
Many real estate speculators, developers, and flippers employ hard-money loans. Hard-money loans are faster than bank loans. Hard money lenders may release funds in 10 business days, whereas standard banks need 30–50 days. Hard money lenders often lend 65% to 75% of the property’s value over 6 to 18 months.
Property flippers seeking hard-money loans may refurbish and resell the collateral within a year. Hard-money loans are more expensive, but the borrower plans to pay them off promptly.2
Hard money loans for turnarounds, short-term funding, and borrowers with bad credit but significant property equity are available. A hard-money loan can prevent foreclosure due to its speedy issuance.
You may invest in hard-money lending. Many have utilized and used this business strategy.
Special Hard Money Loan Considerations
The lender’s increased risk makes hard money loans more expensive than bank or government loans. Although more expensive, it offers speedier access to funds, less demanding approval, and flexibility in repayment schedules.
Pros and Cons of Hard Money Loans
As with every financial product, hard-money loans have pros and cons. These loans are simple to obtain, have high LTV ratios, and have high interest rates.
Pros
- The approval procedure for hard money loans is typically faster than for mortgages or other regular loans through banks. Because the lender prioritizes collateral over financial status, private investors who support hard-money loans can make judgments faster.
- Lenders spend less time checking income and financial records on loan applications. If the borrower knows the lender, it will go faster.
- Hard loan investors may have more potential to resell the property if the borrower defaults, making repayment less critical.
Cons
- Hard money loans have lower LTV ratios than typical mortgages (80%), but they can go higher if the borrower is an experienced flipper. The property is the only insurance against default.
- High interest rates also occur. Hard-money loans may have higher rates than subprime loans.
- Due to regulatory scrutiny and compliance regulations, hard loan lenders may not finance owner-occupied homes.
What are typical hard-money loan terms?
Hard money loans are short-term, spanning 3–36 months. Hard money lenders often finance 65% to 75% of the property’s worth at 10% to 18%.
Are hard-money loans good investments?
How you spend the money matters. Hard money loans are ideal for wealthy individuals who require investment property cash rapidly without the hassle of bank borrowing. They can help you pay for a one-time project or expenditure, provided you’re confident you can repay the loan.
What Are Hard Money Loan Risks?
Hard-money lenders assume a greater risk than standard lenders. Hence, they demand higher interest rates. They may need a more significant down payment and a shorter repayment time than typical loans.
Bottom Line
Many real estate speculators, developers, and flippers employ hard money loans. They may be structured faster than bank loans and have short maturities of 6 to 18 months. Real estate investors who aim to refurbish and resell the collateral may seek hard money loans. Hard money loans are more expensive, but the borrower plans to pay them off promptly.
Conclusion
- Hard-money loans are primarily for real estate.
- Usually from individuals or companies, not banks.
- Hard money loans raise money rapidly but at a more significant cost.
- Funding is faster because hard-money loans rely on collateral rather than applicant finances.
- Lenders and borrowers can negotiate complex loan terms.
- Property usually secures these loans.
